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Abolish the Corporate Income Tax

by John Steele Gordon

January 06, 2014

Source: Commentary

This morning, to my slack-jawed astonishment, the New York Times ran an op-ed calling for the abolition of the corporate income tax.

The author, Laurence J. Kotlikoff, an economics professor at Boston University, writes, “That might sound like a giveaway to the rich. It’s not. The rich . . . can take their companies and run — and not just from Washington State to, say, North Carolina. To avoid our federal corporate tax, they can, and often do, move their operations and jobs abroad.”

Could it be that the Times has finally realized that capital has feet? The U.S. corporate income tax is now the highest in the world and the requirement that income earned abroad is taxed when it is repatriated has kept trillions in American capital from coming into this country. This has had very adverse economic effects, as Professor Kotlikoff shows by detailing the positive effects of abolishing the tax.

The corporate income tax was instituted under President William Howard Taft as a means of taxing the incomes of the rich until a personal income tax amendment could be added to the Constitution (which it was in 1913). At the beginning of the 20th century corporate stock was owned almost entirely by “the rich.” Today, however, the situation is entirely different. Corporate stock is very widely held, with much of it in the hands of pension funds, mutual funds, and the tax-deferred retirement accounts of middle-class families. Billions more is owned by eleemosynary foundations.

And who actually pays the tax is a very knotty economic problem. Depending on the competitive situation in the particular industry, the tax is paid by some combination of workers, through lower wages, customers, through higher prices, and stockholders through lower stock prices. And the corporate income tax forces companies to focus not on pretax profit—which is wealth creation—but on after-tax profit, which is largely a matter of lobbying success in Washington. So abolishing the corporate income tax would be very bad news for K Street and almost no one else. (Soaring unemployment in the lobbying industry? Pardon me while I shed a tear.)

Corporate income tax receipts in 2012 were $351 billion, less than 10 percent of total federal tax receipts, but still that would be a big hole in the budget if that were all there was to it. But, as Professor Kotlikoff explains, it’s not:

Fully eliminating the corporate income tax and replacing any loss in revenues with somewhat higher personal income tax rates leads to a huge short-run inflow of capital, raising the United States’ capital stock (machines and buildings) by 23 percent, output by 8 percent and the real wages of unskilled and skilled workers by 12 percent.

Abolishing the corporate income tax, thus, would largely pay for itself. In other words, changes in tax policy have dynamic economic effects and lowering taxes has positive economic effects, often-dramatic ones. Who knew? And the utter lack of coordination between the personal and corporate incomes taxes has been one of the prime drivers of ever-greater tax complexity and unfairness for those who can’t play one off against the other.

Abolishing the corporate income tax would be a big step in the right direction.